Fooling Some of the People All of theTime
by David Einhorn
John W. Wiley & Sons 379 pp Hardback
So, I do have something in common with Joel Greenblatt. I’d rather it was investment talent but, as the celebrated value investor writes in the foreword to David Einhorn’s Fooling Some of the People All of the Time, “I read this book in two sittings. If eating and sleeping hadn’t gotten in the way, it would have been one.”
Fooling Some of the People All of the Time can, according to one’s interest and frame of mind, be read on several levels. As beach reading, the subtle interpolation of the sometimes arcane detail of financial weaponry into a relentless plot has more than a touch of Tom Clancy. As an investment tome, it’s a reminder that even the most intensive research and being right on the facts doesn’t mean a position is going to be particularly, let alone spectacularly, profitable.
And as a parable of the ills that beset the U.S.? Einhorn does not make so bold—he admits to only having written the book to document the wrongdoing of his long-time piñata Allied Capital (ALD) and expose regulatory indifference (at best) —but it’s all here: squandered treasure; richly-rewarded dishonesty; bureaucratic misfeasance touching most points on the arc from blithering incompetence through smug inertia to outright venality; and inquisitors’ cannons spiked by a strategic campaign contribution. Or two.
The broad strokes of Einhorn’s dalliance with Allied Capital are by now well known.
He began shorting the business development company in 2002. Deploying resources available only to the most successful investors, he uncovered wells of skullduggery still being tapped today. For his trouble, he’s been investigated by the US Securities and Exchange Commission, ignored by the Small Business Administration, and had his phone records stolen in a pre-texting attack that predated the Hewlett-Packard scandal. Oh, and he got his wife, the journalist Cheryl Strauss Einhorn, fired from Barron’s after 10 years there as a writer and editor.
“It was a bad few days,” Einhorn writes. I bet.
Meanwhile, Allied Capital has carried on cheating, pretty much regardless. It said, despite overwhelming evidence to the contrary, that criminal behavior exposed at a subsidiary’s Detroit office was the work of a few rogue individuals. It settled an investigation of its accounting practices without admitting or denying the findings, with the SEC deciding it needn’t bother fining or otherwise sanctioning the company.
Putting aside the fact that he’s turned out a near 400-page book on the experience, Einhorn appears to have retained his perspective. Despite the totally undeserved aggravation, his tone throughout, as it was in his more recent encounter with Lehman Bros (LEH), where his thorough humiliation of chief financial officer Erin Callan forced her departure, is cool, professional, even surgical, and entirely fact-based.
But perhaps the book’s most useful lesson, in a world where hedge funds get the blame for pretty much any financial market disruption anywhere, is about how the best go about their work. Hard work, detailed work, and doubtless for every Allied Capital or MBIA (MBI) or Lehman (LEH) project that bears fruit are a dozen more that don’t go anywhere, and a few more that don’t work out quite as planned (New Century q.v.).
The credit implosion has taken its toll on Allied Capital; its stock, which traded in the low $30s through most of 2007, is now in the sub-teens and sporting the sort of unsustainable yield — 20 per cent — normally associated with junk bonds heading from mob-controlled landfill to Superfund toxicity. But still the sleaze, and the denial, carries on.
As recently as Sunday, Aug. 3, The New York Times’ Gretchen Morgenson reported that a scathing 2007 audit of the Small Business Administration’s oversight of one of its top private lenders remains — yep, the Allied Capital subsidiary Business Loan Express — remains hidden from view. And why?
Also under wraps in the public report was SBA management’s view that it should not suspend BLX’s preferred lending because that would “immediately put BLX out of business.”
Which, speaking as a taxpayer in these here United States, would be a damn good start.